Tax cuts won’t pay for themselves

This Tuesday evening, President Donald Trump will address a joint session of Congress, which is the traditional forum for new Presidents to unveil details of their economic plans. With Trump hinting in recent weeks that a “major” announcement on taxes is coming soon, the markets might take a dim view if he focuses instead on other policy areas, such as immigration, or uses the opportunity to bash the media again. We would normally expect a formal budget proposal within a few weeks. The Trump budget will, as a matter of supply-side orthodoxy, assume that the tax cuts largely pay for themselves by boosting economic growth. Unfortunately, this has already been tried twice before, with the Reagan tax cuts in the early 1980s and the Bush tax cuts in the early 2000s. There is little evidence that either boosted productivity or labour force growth. The upshot is that tax cuts will inevitably mean much bigger budget deficits.